Killing the Messenger: The Downsizing and Death of the Postal Service

It is fashionable to think of the postal service as an antiquated relic of a different era in the same way that all right-thinking people regarded standard 30-year fixed rate mortgages as old-fashioned at the peak of the housing bubble. Many of the same people who assured us that we could effectively manage risk through mortgage securitization are now anxious to hand the postal service a death sentence.

Death, or at least a near-death experience, is the likely outcome of S.1789, the bill to downsize the Postal Service that the Senate is scheduled to vote on Tuesday night. The bill would end Saturday delivery and also raise the target delivery time from 1-2 days to 2-3 days.

The idea is that people won't generally care if a letter takes three days rather than two to reach its destination. While that is probably true, this will certainly increase the frequency with which a letter takes a week or more to reach its destination, and people do care about and remember these instances. This additional delay is likely to seriously reduce the standing of the Postal Service in most people's eyes, leading to a further erosion of business.

The certain effect of this bill is to cut 100,000 jobs over the next three years. This is somewhat better than the 200,000 job loss that would result from a bill being pushed by Representative Darrell Issa and the House Republicans, but any final bill is likely to end up somewhere in the middle. If we assume 150,000 lost jobs, that is equivalent to more than 5 weeks of job growth at the March rate.

Or, to take another comparison in the news, the Postal Service would be eliminating about 20 times as many jobs as would be created by the Keystone Pipeline. Even if the Postal Service were wracked by waste and inefficiency as its critics contend, it doesn't make sense to apply the ax at a time when the economy is still suffering from massive unemployment. The haste to reduce Postal jobs now will simply add to unemployment.

But the assumption that the Postal Service is an uncompetitive basket case requires closer examination. The Postal Service has been crippled by a series of accounting rulings that have imposed enormous penalties on it ever since it was first established as a government-run company (as opposed to a government agency) in the early '70s.

The initial sin was the division of pension liabilities between the new company and government for its workforce at the time it became independent. A fair division of liabilities would have implied that a private buyer would have paid neither more nor less for the Postal Service due to its remaining pension liabilities.

As the deal went down, the Postal Service was stuck with a large portion of the liabilities that were effectively accrued prior to its establishment as an independent company. Independent auditors put the hit to the postal service in the range of $50-$75 billion. That would cover the cumulative losses of the system over the last decade several times over.

The second accounting hit to the Postal Service is the restriction that it can only invest its pension in government bonds, rather than the stocks and other assets held by private pension funds. Since bonds provide a considerably lower rate of return on average, this means the Postal Service must put aside much more money to offer the same pension as a private competitor like UPS.

The difference in returns is a big deal. If the Postal Service will need to pay $20 billion in pensions in 30 years, it would have to put aside roughly $2 billion this year using the rate of return assumption that private pensions had traditionally used. On the other hand, it would have to put aside almost $4 billion using the assumed rate of return on government bonds. The restriction that the pension can only invest in government bonds is a very serious handicap for the Postal Service.

Finally, in 2006 Congress decided that the Postal Service had to rapidly pre-fund its retirement health benefits. The extent of prefunding required by this measure vastly exceeds the level of prefunding for retiree benefits in any private company in the entire country.

If the explicit intent of Congress was to destroy the Postal Service it would be difficult to envision a more effective route than imposing a huge and arbitrary prefunding burden like this one. If the Postal Service had a more reasonable prefunding requirement and were allowed to invest its pension in the same way as private companies, it would have run a profit over the last decade.

This does not change the fact that the Postal Service faces enormous challenges going forward. First class mail volume, the system's bread and butter, has collapsed. Some of this is due to the recession, but most of it is clearly technological. It's easier and cheaper to pay bills online.

But the Postal Service can and is moving into new markets. For example, it actually acts as the delivery agent for almost one-third of the packages shipped through FedEx's ground division. Its massive nationwide network offers many potential opportunities, if Congress will give it the chance.

This means relaxing the arbitrary pre-funding restrictions. Caution is great, but Google and Apple didn't get ahead by prefunding their real estate taxes for the next century.

Congress also has to be prepared to allow the Postal Service to win. About a decade ago, the Postal Service had an extremely effective ad campaign highlighting the fact that its express mail service was just a fraction of the price charged for overnight delivery by UPS and FedEx.

The two companies actually went to court to try to stop the ad campaign. When the court told them to get lost, they went to Congress. Their friends in Congress then leaned on the Postal Service and got it to end the ads.

The goal is to have a public Postal Service that can compete effectively in the market. But it's not a fair fight when we shove it into the ring with its shoes tied together and both hands tied behind its back.